A Crummey Trust is a Good Thing

Clydesdale HorsesUsually "crummy" and "tax law" make you think of people in orange jumpsuits in white collar penitentiaries.  But not so with the so-called "Crummey" trust, a work-horse in the estate planning stable.

The Wall Street Journal just ran a piece on Crummey Trusts, saying "There's nothing crummy about a Crummey trust—even in a period of higher exemptions for estate and gift taxes."   If you have an insurance trust or even a trust for your kids, you probably have a "Crummey Trust" and its working just fine.

"Here is how a family can use a Crummey trust: Have your estate planner set up one to buy a life-insurance policy, and fund the premiums with annual gifts. (Each year, a person can give unlimited separate gifts of up to $13,000—the current annual ceiling for gifts to individuals.) That gets money out of the estate while skirting the gift tax. Since the trust owns the policy, the death benefit ultimately goes to the trust, shielding it from federal estate taxes.

Crummey trusts are used in many circumstances, but are best suited for making gifts to minors—especially when a parent is giving money to a young child who isn't ready to handle a large sum. Grandparents, on the other hand, often are giving money to grown children, or have already helped fund a college-savings 529 plan."

Why "Crummey" by the way?  It was the name of the taxpayer who won the case allowing gifts to trusts to qualify for the $13,000 (currently)  so long as notice of withdrawal was given to the beneficiaries.

But like all good things, there is a catch.  To get the benefits, there is an annual paperwork requirement.

"The trustee must send out "Crummey letters" each year, informing beneficiaries that they can withdraw the gifted amount during a window of time, say 30 days. Usually, the beneficiary leaves the money in the trust. But the IRS considers it a tax-free gift only if the person has the right to take it in the short term, and the Crummey letter proves that he has that right."

This leads to many issues, including:

  • What if the Trustee forgets to send the notices?  Then you have made taxable gifts each year.
  • What if a beneficiary is a spendthrift and you don't want to give them a right of withdrawal?

The key - explain your family situation clearly to your estate planning attorney so he or she can see if "Crummey" is a good fit for you.

Thanks to @raniacombs for tweeting this to @VeteranAid who brought this to my attention!


No-Contest Will Clauses in New Jersey - Don't Bother

Cut MoneyI'm sure we have all seen the TV dramas where a Will reading is portrayed in which ridiculously rich grandma shocks the family by leaving a child a token bequest ("my antique car" or "$50,000") and has a provision in the Will that if the child challenges the Will then they get nothing.  This is known as "No-contest" or "In terrorem clause". (Don't things sound more important in Latin?)

In New Jersey, "No-contest" or "In terrorem" clauses belong in the world of fantasy.  N.J.S.A. 3B:3-47 provides that “a provision in a Will purporting to penalize any interested person for contesting the Will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings.”  Probable cause is such a low standard that the New Jersey Practice Series in describing In terrorem clauses says "The testator usually wants to prevent a person from contesting a will, whom he does not want to benefit. There is no way of doing this."  End result?  No-Contest clauses are unenforceable in New Jersey.

So what is a person to do who really, really, really does not want a family member to benefit when they die, and furthermore, knows that the person that they are cutting out is a litigious pain in the xxxx who will delight in using their death to threaten and emotionally blackmail the actual beneficiaries?  First, share your concerns with your estate attorney, in detail, so he or she can make sure that sufficient evidence exists in the file to defend a Will challenge.  Next, try to communicate your desires to all your family members.  We have seen much litigation that might have been avoided had the now decedent recognized that leaving people guessing as to why they did "x" or "y" is breeding grounds for a lawsuit. Finally, understand that the legislative presumption is to allow your Will to be questioned after your death and consider using alternative means such as lifetime gifts and non-probate assets to effectuate your intent.

What does your Credit Card say about you?

 I ran across this neat article at mint.com about how to "read" your credit card. Apparently all those digits mean something to the issuers, and tell a story about you.  It's best to read this one at the source, but some tidbits are:

  • The first digit shows if the issuer was an airline, bank or other institution
  • The first 6 digits are the issuer code

Most interesting, there is a math trick to see if a credit card number is "real", which can help you spot bogus cards.

Why Have a Blog if you can't use if for the Greater Good?

While this blog is and always will be an educational resource allowing our readers to make better decisions and become more knowledgeable, I recognize that we have developed a terrific following over the years.  If you have had an article or thought touch you or help you or open possibilities, I would like to ask you to keep reading and consider giving back.

Each year my family participates in a Break-a-Thon at our martial arts school.  Last year we raised over $50,000 for children's charities.  This year, I am so pleased that we will be supporting Operation Smile and the American Red Cross.  Both of these organizations do such valuable work..  

  • For each $250 raised, Operation Smile can perform a surgery to change a child's life by fixing facial birth defects.  Last year over 60 children had life changing operations from our fund-raising efforts. Such a small amount for a miraculous change.  
  • The immense value of the American Red Cross wasn't truly real to me until a few weeks ago when Hurricane Irene devastated towns that my friends live in and I shop and do business in.  Imagine - flooded house, ruined business, destroyed livelihood.  The American Red Cross was there for my friends and neighbors offering organized, immediate support.

Our family is part of a team whose goal is to raise $3000 for these charities.  I ask that if you have gotten value from this blog over the years, that you consider making a donation through our FirstGiving page at http://www.firstgiving.com/fundraiser/trevor-liss/break-a-thon-2011.  (By the way - if you are involved in a fundraiser, consider leveraging Firstgiving.com - our donations more than doubled the first year we added it to the Break-a-Thon).  

In reading our team's story you will see that every little bit helps.  We will break 1 board for every $5 raised.  You will also see that by donating to this effort you will be supporting two admirable young men who are actively giving of their time, financial resources, and energy to those less fortunate.  

Thank you for your support.

- Deirdre Wheatley-Liss

Caregiver Child Exception to Transfer of a Home - You need to have good facts

Family HomeA recent appeals court case underscores the importance in New Jersey of being able to factually prove that a child in fact provided care to a parent for the transfer of the home to that child to be an exception to the Medicaid transfer rules.

Generally speaking, a transfer of assets without compensation within 5 years of an application for Medicaid will cause a penalty period to be assessed.   One very important exception to this is the "Caregiver Child Exception". The Caregiver Child Exception basically indicates that if the child has (1) resided in the parent's home for at least 2 years, and (2) provided a level of care to the parent that allows the parent to stay at home and not have to enter into an assisted living or nursing facility, then the transfer of the home to that Caregiver Child does not create a penalty for Medicaid purposes. See N.J.A.C. 10:71-4.10(d).

The recent case of  V.P. v. Dept. of Human Services, decided by the New Jersey Appellate Division September 2, 2011, underscores the importance of being able to prove that the Caregiver Child actually provided assistance to the parent, which allowed the parent to remain at home instead of needing to enter a care facility. In this case, the Caregiver Child brought a variety of witnesses  to testify to the fact that the Caregiver Child actively helped the parent. The key lesson here is that if the family is planning on potentially using the Caregiver Child exemption to allow the caregiver child remain in the home after the parent needs to enter the nursing home, then the family must maintain credible and substantiated evidence of the fact that the child is in fact providing care to the parent.

Elderlawanswers.com has kindly provided a summary of this important case:

A New Jersey appeals court rules that the transfer of a Medicaid applicant's house to her caregiver son is not subject to a Medicaid penalty period because it falls within the caregiver child exception. V.P. v. Dept. of Human Services (N.J. Sup. Ct., App. Div., No. A-2362-09T1, Sept. 2, 2011).

V.P. lived with her son, R.P. Following a stroke, she entered a nursing home, transferred her house to her son and applied for Medicaid benefits. The state determined V.P. impermissibly transferred her home and was subject to a penalty period.

V.P. appealed, arguing her house was not a countable asset because the transfer fell within the caregiver child exception. At a hearing, several family members and V.P.'s doctor testified that R.P. helped V.P. walk, bathe, and cook, among other things. The administrative law judge (ALJ) found the witnesses credible and determined the caregiver child exception applied. However, the state's Medicaid director rejected the ALJ's decision and concluded V.P. needed only normal support services, so the transfer was not eligible for the caregiver child exception. V.P. appealed.

The New Jersey Superior Court, Appellate Division, reverses, holding that V.P. is entitled to Medicaid benefits with no penalty period. The court rules that the director did not demonstrate that the ALJ's findings were arbitrary and capricious. According to the court, "the credible evidence in the record supports the ALJ's finding that V.P needed, and R.P. provided, special care and attention essential to her health and safety."

For the full text of this decision in PDF, go to: http://www.judiciary.state.nj.us/opinions/a2362-09.pdf


When a Power of Attorney isn't Enough a Guardianship may be Needed

Power of AttorneyStacey Crowell Maiden, Esq. was the speaker at the 2011-2012 opening meeting of the Estate and Financial Planning Council of Central New Jersey (EFPCCNJ) on September 7, 2011, presenting the topic: Guardianships & Conservatorships: Court Strategies When You Question Your Client’s Capacity.

The goal of the presentation was to educate estate and financial planners of the court procedures involved if a client’s diminished capacity prevents effective representation of the client.
We always encourage our estate planning clients to execute comprehensive Powers of Attorney and Living Wills/Advanced Health Care Directives to appoint surrogate decision makers of their choosing to handle financial and medical affairs during their life, along with their Wills, which address disposition of assets after death. If properly drafted, a Power of Attorney and Living Will/Advanced Health Care Directive can supply all of the authority required to obviate the need for a court proceeding to appoint a legal guardian.

However, the mere existence of a Power of Attorney does not bar the need for a legal guardian. Sometimes, the reasons are benign, such as the agent named has passed away and there is no successor agent named, or the Power of Attorney prepared in New Jersey does not comply with the requirements of another state. Other times, there are disputes among multi-party agents, e.g., son and daughter disagreeing as to how mom’s finances should be managed or spent. Unfortunately, there are also situations where the appointed agent under the Power of Attorney is not acting in accordance with the fiduciary standards imposed by New Jersey Statute or generally not in the best interests of the principal.

There is another legal aspect of a Power of Attorney, which may rise to the need for a guardianship. It is important to realize that executing a Power of Attorney does not mean that the person can not continue to act of his or her own behalf. That person may continue to enter into contracts, withdraw large sums of money from bank accounts, take out credit cards, purchase items, gift assets, and execute stock trades, to name just some of the transactions that a person with diminished capacity might engage in to potential personal and family harm. Comments from members of the EFPCCNJ indicated that this is not an uncommon issue. Even though a Power of Attorney is in place, a guardianship action still may be required to foreclose the client with diminished capacity from acting on his own behalf to the detriment of his or herself and family.  

Tax Relief for NJ Residents from Hurricane Irene - Extended filing and payment deadlines

Disaster ReliefHurricane Irene devastated parts of New Jersey last week.  You can see video of massive flooding in Denville, one town over from us.

In response to this, both the IRS and NJ Division of Taxation have extended tax filing and payment deadlines for New Jersey residents living in Bergen, Essex, Morris, Passaic and Somerset counties .  You should carefully consult the revised filing deadlines if you have any tax payment or tax return due between August 27, 2011 and October 31, 2011.

Details below courtesy of Marcum LLP

The New Jersey Division of Taxation is following the federal guidelines for tax relief related to Hurricane Irene Disaster Relief Areas as noted in recent Internal Revenue Service announcements and Marcum Tax Flashes. The five New Jersey counties designated as Presidential Disaster Relief Areas are Bergen, Essex, Morris, Passaic and Somerset (these may be extended based on future disaster area declarations by the President).

Taxpayers residing or that have a business in a designated Presidential Disaster Relief Area now have until October 31, 2011 to file New Jersey tax returns. Return filings covered under the NJ relief provisions will include:

• individual income tax
• corporation business tax
• sales tax and inheritance tax
• estate tax
• partnership
• and other business taxes administered by the Division of Taxation

The tax relief is also extended to payments for any return and/or payment, including estimated payments which have either an original or extended due date occurring on or after August 27, 2011 and on or before October 31, 2011.

The extended due date permits individuals and businesses that received a filing extension until October 17, 2011 to have until October 31, 2011 to file their returns. Businesses that previously obtained a filing extension to September 15, 2011 are also covered by this relief and have until October 31, 2011 to file their returns. Estimated tax payments for the third quarter of 2011 are now due October 31, 2011 instead of September 15, 2011.

In addition to the New Jersey counties, nonresident taxpayers with a filing requirement in New Jersey who are in Presidential Disaster areas in other states also have until October 31, 2011 to file any New Jersey nonresident tax returns that are due during the extension period.

In addition to the above filing and payment relief provisions, the State is providing relief to those taxpayers whose preparers were affected by Hurricane Irene by permitting a delayed filing deadline until September 22, 2011 to file returns normally due September 15, 2011. For this to apply, the taxpayer's preparer must be located in an area that was under an evacuation order or a severe weather warning because of Hurricane Irene (the preparer does not have to be located within a federally declared disaster area). This relief, which primarily applies to corporations, partnerships and trusts that previously obtained a tax filing extension, is available to taxpayers regardless of their location. This relief does not apply to any tax payment requirements.

If you have additional questions about New Jersey tax relief for Hurricane Irene, call the NJ State Hotline at 609-292-6400 or contact your Marcum Tax Advisor.